India frets over Italy flu

Just as India was putting behind the impact of an economic crisis in the West, fresh trouble seems to be brewing in the West, with fears that the debt crisis that hit Greece and has dragged for months could spread to Italy, even as the United States is grapping with the prospect of a potentially disastrous debt default. HT reports. Red alert over Italy

Just as India was putting behind the impact of an economic crisis in the West, fresh trouble seems to be brewing in the West, with fears that the debt crisis that hit Greece and has dragged for months could spread to Italy, even as the United States is grapping with the prospect of a potentially disastrous debt default.

Policy makers in India are keenly watching the developments in the European Union (EU) where finance officials were due for an emergency meeting on Monday, galvanised by the threat of the economic contagion spreading to Italy, the euro zone's third largest economy.

Officially, the 17 ministers were discussing the possibility of buying back Greek debt but Italy was said to be a key item for discussion.

About a quarter of India's merchandise export of about $245 billion is accounted for by EU economies. This could lead to order-books sagging and upsetting an emergent recovery in exports that have grown in high double-digits over the past few months.

Small and medium enteprises peppered across the country that ship products as diverse as handicrafts, gems and jewellery, garments and apparel could be the worst hit.

Slower growth in the European economies could also hurt the broader economy's growth.

"India's growth rate in 2011-12 will be in the range of 8 to 8.5%," C Rangarajan, chairman of Prime Minister's Economic Advisory Council (PMEAC) said, adding that among other reasons, "The process of recovery in the advanced economies is slow."

Investor sentiments have plunged in Rome amid fears that a further delay institutionalising a second Greek package could batter investor confidence in the region.

German chancellor Angela Merkel, who spoke to Italy's Silvio Berlusconi on the phone, said Rome needed to demonstrate it was undertaking the budget reforms needed to restore confidence.

Earlier this month, the Italian government announced a four-year austerity budget worth ¤40 billion ($56.5 billion or Rs 2.54 lakh crore) in a bid to reduce the budget deficit to just 0.2% of output by 2014 from 4.6% last year.

"A natural outcome of integration with the rest of the world is that India will be more affected by global shifts in trade and capital flows," said Rajeev Malik, senior economist at Singapore-based broking and research firm CLSA.